The plan calls for young people to put 15 percent of their salary into
a savings account — whether it be an IRA, 401(k) or taxable account —
starting at 25 years old, he wrote for Business Insider. By spreading
that money to three different kinds of funds, over time the money will
accumulate and turn a milliennial into a millionaire

Whats everyone's take on it? Can saving/investing 15% of your income starting age 25, likely make you a millionaire?

14 Answers
14

Can a middle class family do it with 15%?

Yes, quite easily, in fact.

You left a lot of numbers out, so lets start with some assumptions. If you are at the median of middle income families in the US that might mean $70,000/year. 15% of that is an investment of $875 per month.

If you invest that amount monthly (starting at age 25) and assume a 6% return, then you will have a million dollars at approximately 57 years old. 6% is a very conservative number, and as Ben Miller points out, the S&P 500 has historically returned closer to 11%. If you assumed an aggressive 9% return, and continued with that $875/month for 40 years until you turn 65, that becomes $4 million.

Could a poor person do it?

Start with a much more conservative $9/hr for $18,720 per year (40 hours * 52 weeks, no overtime). If that person saved 14% of his/her income or about $219 per month from 25 to 65 years old with the same 9%, s/he would still achieve $1 million for retirement.

Is it much harder for a poor person? Certainly, but hopefully these numbers illustrate that it is better to save and invest even a small amount if that's all that can be done.

What does this imply for the software developers that pull in 6 figure salaries?

High income earners have the most to gain if they save and the most to lose if they don't. Let's just assume an even $100,000/year salary and modest 401(k) match of 3%. Even married filing jointly a good portion of that salary is going to be taxed at the 25% rate. If single you'll be hitting the 28% income tax rate.

If you can max out the $18,000 (2017) contribution limit and get an additional $3,000 from an employer match (for a total monthly contribution of $1750) 40 years of contributions would become $8.2 million with the 9% rate of return.

If you withdrew that money at 4% per year you would have a residual income of $300k throughout your retirement.

It depends on how much you save, how much your savings earns each year.

You can model it with a very simple spreadsheet:

Formula view:

You can change this simple model with any other assumptions you wish to make and model. This spreadsheet presumes that you only make $50,000/year, never get a raise, that your savings earns 6% per year and that the market never has a crash like 2008. The article never states the assumptions that the author has made, and therefore we can't honestly determine how truthful the author is.

A fantastic answer which actually includes the maths! I'm not so sure why so many answers have been voted higher when they just state it's possible without giving the maths - if the OP knew how to do the maths themselves they probably wouldn't have asked the question.
– AndyTJul 28 '17 at 8:30

2

Note that you don't actually have to use an iterative method like this (though, of course, it does work.) You can just do amountSavedPerYear x ((1 + interestRate) ^ numberOfYears), where interestRate is expressed as a fraction to get the final answer.
– reirabJul 30 '17 at 19:42

1

This answer also shows how defective the model is. Most people will not consistently make 50k or more, but much less in the beginning, when it matters most and more later on, when it has less time to accumulate interest. Also, like you said, this operates on the (very very very optimistic) predicition that there won't be another market crash ever.
– MagischJul 31 '17 at 11:55

1

@Magisch: Note that the group of people who put away a substantial fraction of their (lower) early wages and keep them invested for decades show traits that will make a very substantial difference to the average (western) person (the linked article says "if you can follow this simple recipe"): being able (in practice) to live well below their current means, and being able (again in practice) to not spend savings/investments.
– cbeleitesAug 1 '17 at 16:14

You are a 21 year old programming genius and your first job out of school you start off making $150K/year.

You live in your parents basement so therefore you have no expenses, and can sock away your entire salary. You also live in a state without state income tax.

Your company provides a generous raise of 6% per year.

You exclusively invest on the good side of the S&P 500, and consistently get a 12% return each year.

After your parents pass away they leave you with enough money to continue living in their house expense free for the rest of your life. You may or may not decide to remain in the basement despite there being available rooms upstairs.

You decide to retire at the ripe young age of 80.

If my calculations are correct, in the above scenario, at age 80, you would have more than a billion in the bank, after taxes.

So at my age and income, I only need to quintuple my salary, live to be 100, convince my parents to move and let me live with them rent-free (even though I now make more than they do combined), and I'm all set!
– Dan HendersonJul 27 '17 at 22:05

Why wait until you're eighty? Just spend the thousands on lottery tickets and hit the jackpot. Because that's what this strategy is saying: get lucky at the start and stay lucky forever.
– NijJul 28 '17 at 5:15

7

@Nij - I started with believable numbers and slightly stretched each variable just to make it hit a billion after taxes. But if you change the numbers to be reasonable all the way through, you still can get between $10 and $50 million. I actually know a guy who did this. He was an engineer who lived with his mother until he got married at age 55. He had many millions in the bank by that time. The best part of this story is that his wife had no idea how much money he had until after they were married.
– TTTJul 28 '17 at 15:56

5

@MartinSchröder - in the last 60 years the average return has been 11.45%. That includes the stock crashes. I suggested investing on the "good side" of the S&P so you can eek out 12%. (That's a joke, btw, you can't knowingly invest on the "good side" of anything.)
– TTTAug 1 '17 at 14:16

Yes, becoming a millionaire is a reasonable goal. Saving 15% of your income starting at age 25 and investing in the stock market will likely get you there.

The CAGR (Compound Annual Growth Rate) of the S&P 500 over the last 35 years has been about 11%. (That 35 years includes at least two fairly serious crashes.) You may get more or less than that number in the future, but let's guess that you'll average 9%.

Let's say that you begin with nothing invested, and you start investing $100 per week at age 25. (If your annual income is $35,000, that is about 15% of your income.) You decide to invest your money in an S&P 500 index mutual fund.

35 years from now when you are 60 years old, you would be a millionaire ($1.2 Million, actually).

You may earn less than the assumed 9%, depending on how the stock market does. However, if you stick with your 15% investment amount throughout your whole career, you'll most likely end up with more, because your income will probably increase during your career. And you will probably be working past age 60, giving your investments time to earn even more.

I used much more conservative numbers because I wanted to demonstrate that it's true even for someone who is very risk averse with their investments.
– Nathan LJul 27 '17 at 18:36

2

@NathanL And I decided to use a somewhat optimistic return assumption, because I wanted to emphasize that it is doable even for someone with a fairly low income. Nothing is guaranteed, but we do have 100 years of history on our side.
– Ben MillerJul 27 '17 at 18:40

The lower income earner also has the advantage when using a Roth IRA. Lots more could be said on the subject in favor of the poor investing even small amounts toward retirement.
– Nathan LJul 27 '17 at 18:54

@NathanL That's true; taxes are a whole other discussion. But this site needs a simple question and answer to "Is it possible for low income people to invest and become millionaires?" that doesn't get closed. I hope this is it.
– Ben MillerJul 27 '17 at 18:58

9

Note that that $100/week probably is less than what a lot of low to middle income people spend on car payments, fancy cell phone contracts, and gazillion-channel cable TV.
– jamesqfJul 28 '17 at 4:21

Put equal amounts of that 15% into just three different mutual funds:
• A U.S. total stock market index fund
• An international total stock market index fund
• A U.S. total bond market index fund
Over time, the three funds will grow at different rates, so once per year
you'll adjust their amounts so that they're again equal.
That's it.

none of these graph have axis labels which makes it ver difficult to understand what you are plotting. label your graphs kids.
– TommyAug 1 '17 at 0:18

also, I would seriously disagree with the equal allocation in the US index. Look at your chart, it literally provides only negative utility. Returns are lower and it didn't survive 2008 either. VGTSX added literally no benefit to this portfolio over the 15 years shown.
– TommyAug 1 '17 at 0:20

@Tommy The individual index value plot points in the 3rd chart are the values prior to annual rebalancing. That is why the US index, VTSMX, is lower in, say, April 2006 when it underperformed the int'l index, VGTSX. This underperformance can also be observed in the first chart. These indices were chosen simply to match William Bernstein's specification, so flaws in the choices reflect notable weaknesses in the strategy, the discovery of which is part of the purpose of modelling. If you have better choices I could run another simulation. Choices with longer history than 21 years would be good.
– Chris DegnenAug 1 '17 at 8:26

Let's assume 6% is the rate of return you can expect. You are age 25, and plan to retire at age 65. If you have $0 and want $1M at retirement, you will need to put away $524.20/month, or $6,290.40/year, which is 15% of $41,936. So $41,936 is what you'd need to make per year in order to get to your target.

You can calculate your own figures with a financial calculator: 480 months as your term (or, adjust this to your time horizon in months), .486755% as your interest (or, take your assumed interest rate + 1 to the 1/12th power and subtract 1 to convert to a monthly interest rate), 0 as your PV, and $1M as your FV; then solve for PMT.

Your current income is likely not enough

I see a lot of answers calculcating with incomes that are much higher than yours, here is something for your situation:

If you would keep your current income for the rest of your life, here is approximately how things would turn out after 40 years:

Easy estimation of impact over 40 years

All interest is calculated relative to the amount in your portfolio. Therefore, lets start with 1 dollar for 40 years:

0% annual return: 480 dollar

4% annual return: 1181 dollar

8% annual return: 3491 dollar

12% annual return: 11764 dollar

With your current income, 15% would be 82.5 dollar. At 12% this would over 40 years get you almost 1 million dollar. I would call a required return of more than 12% not 'likely'.

What if your income increases

The good news, is that your income will likely increase, and especially if this happens fast things will start to look up.
The bad news is, that your current salary is quite low. So, it basically means that you need to make some big jumps in the next few years in order to make this scenario likely.

Assuming 8% annual return, and a salary growth of 1% per month for the next 17 years (and 0% growth afterwards). You would end up with a million after 40 years.

For comparison, assuming 8% annual return and a salary growth of 0.5% per month for the next 40 years, you would end up with 'only' about 660k

Conclusion

If you can quickly move your salary towards ranges that are more common in the US, then 15% of your income can build up to a million before you retire. However, if you just follow gradual growth, you would need to get quite lucky to reach a million.

Note that even if reaching a million appears unlikely, it is probably still a good idea to save!

"Note that even if reaching a million appears unlikely, it is probably still a good idea to save!" Indeed, especially since cost-of-living is likely much lower in Pakistan than in the U.S. (or Europe, etc.) A million USD is not required in Pakistan to have the same standard of living that a million USD would provide in the U.S.
– reirabJul 30 '17 at 19:54

1

@reirab Indeed, as OP does say that $500/month is enough for a decent life. Assuming wanting to maintain that for 35 years, and putting the money in the mattress as well as ignoring inflation after retirement (I don't recommend either), you only need $210k (in today's dollars, obviously) when you retire. A million dollars would give about $1200/month for a good 70 years, or nearly $2400/month for 35 years, clearly far above where OP is now.
– a CVnJul 30 '17 at 20:22

As others have shown, if you assume that you can get 6% and you invest 15% of a reasonable US salary then you can hit 1 million by the time you retire.

If you invest in property in a market like the UK (where I come from...) then insane house price inflation will do it for you as well. In 1968 my parents bought a house for £8000. They had a mortgage on it for about 75% of the value. They don't live there but that house is now valued at about £750,000. Okay, that's close to 60 years, but with a 55 year working life that's not so unreasonable. If you assume the property market (or the shares market) can go on rising forever... then invest in as much property as you can with your 15% as mortgage payments... and watch the million roll in. Of course, you've also got rent on your property portfolio as well in the intervening years.

However, take the long view. Inflation will hit what a million is worth. In 1968, a million was a ridiculously huge amount of money. Now it's 'Pah, so what, real rich people have billions'. You'll get your million and it will not be enough to retire comfortably on! In 1968 my parents salaries as skilled people were about £2000 a year... equivalent jobs now pay closer to £50,000... 25x salary inflation in the time. Do that again, skilled professional salary in 60 years of £125000 a year... so your million is actually 4 years salary.

Not being relentlessly negative... just suggesting that a financial target like 'own a million (dollars)' isn't a good strategy. 'Own something that yields a decent amount of money' is a better one.

@matt specific to UK property the issue here is if you don't have any property you have to get it at the high price (I guess in part due to high demand and low availability where needed/wanted) - also some analysts think there is a housing bubble and the prices will fall at some point anyway.
– WilfJul 30 '17 at 12:28

Other people have already demonstrated the effect of compound interest to the question. I'd like to add a totally different perspective.

Note that the article says

if you can follow this simple recipe throughout your working career, you will almost certainly beat out most professional investors [...] you'll likely accumulate enough savings to retire comfortably.

(the latter point may be the more practical mark than the somewhat arbitrary million (rupees? dollars?)

My point here is that the group of people who do put away a substantial fraction of their (lower) early wages and keep them invested for decades show (at least) two traits that will make a very substantial difference to the average (western) person. They may be correlated, though: people who are not tempted or able to resist the temptation to spend (almost) their whole income may be more likely to not touch their savings or investments. (In my country, people like to see themselves as "world champions in savings", but if you talk to people you find that many people talk about saving for the next holidays [as opposed to saving for retirement].)

Also, if you get going this way long before you are able to retire you reach a relative level of independence that can give you a much better position in wage negotiations as you do not need to take the first badly paid job that comes along in order to survive but can afford to wait and look and negotiate for a better job.

Psychologically, it also seems to be easier to consistently keep the increase in your spending below the increase of your income than to reduce spending once you overspent.
There are studies around that find homeowners on average substantially more wealthy than people who keep living in rental appartments (I'm mostly talking Germany, were renting is normal and does not imply poverty - but similar findings have also been described for the US) even though someone who'd take the additional money the homeowner put into their home over the rent and invested in other ways would have yielded more value than the home. The difference is largely attributed to the fact that buying and downpaying a home enforces low spending and saving, and it is found that after some decades of downpayment homeowners often go on to spend less than their socio-economic peers who rent. The group that is described in this question is one that does not even need the mental help of enforcing the savings.

In addition, if this is not about the fixed million but about reaching a level of wealth that allows you to retire: people who have practised moderate spending habits as adults for decades are typically also much better able to get along with less in retirement than others who did went with a high consumption lifestyle instead (e.g. the homeowners again).

My estimate is that these effects compound in a way that is much more important than the "usual" compounding effect of interest - and even more if you look at interest vs. inflation, i.e. the buying power of your investment for everyday life.

Note that they also cause the group in question to be more resilient in case of a market crash than the average person with about no savings (note that market crashes lead to increased risk of job loss).

Slightly off topic: I do not know enough how difficult saving 50 USD out of 50 USD in Pakistan is - and thus cannot comment whether the savings effort called for in the paper is equivalent/higher/lower than what you achieve. I find that trying to keep to student life (i.e. spending that is within the means of a student) for the first professional years can help kick-starting a nest egg (European experience - again, not sure whether applicable in Pakistan).

If by being a millionaire you mean dollar millionaire then I doubt that it is really that easy in Pakistani context. At present the exchange rate is 107 Pakistani rupees per US dollar so even with this exchange rate, to have a million US dollars means having 107 million rupees of wealth. Now with this maths in mind you can very well calculate how much possible it is for an average 25 years old Pakistani to have that much wealth. And by the time you have 107 million Pakistani rupees of wealth the exchange rate against the US dollar would have only gone up against Pakistani currency.

That article which you have mentioned makes calculations in US context and dollar terms. However if you talk only in terms of your country's context then being a millionaire means having 1 million rupees of wealth and that is something which is quite achievable with your salary and within very short span of time.

The really simple answer is that compound interest is compound not linear.
Money invested for longer earns more interest, and the sooner you start investing, the longer it has to earn interest.

These ideas come out of pension investment where 65 is the usual retirement age and what you invest in the 1st ten years of your pension (or any other compound interest fund) accounts for over 50% of what you will get out.

25 to 65 is forty years and $100 invested at 7% for 40 years is $1400.
$100 invested every year for 40 years the pot would be worth just under $20,000. At 30 years, it would be worth under $10,000, and at 20 years it would be worth only $4099.

If you double your investment amount every 10 years you would have invested $15700, and the pot would be worth $45,457. Do exactly the same but starting at 35 instead of 25 and your pot would only be worth $14,200.

The sentiment is correct, but one major typo. 7% for 40 years? Closer to 16X, to be precise, 14.97X or $1500 for that $100 deposit. My 18 yr old has been saving since she started baby sitting at age 12. Hoping to have $50K by the time she's out of college. 40 years later, there's close to that million $$.
– JoeTaxpayer♦Aug 1 '17 at 17:49

I just want to point out a couple of things, and I do not have enough reputation to comment.

I see lots of weird assumptions about returns in the stock market. Do not assume more than 4% return on the long term, anything more than this is unreasonable. It has been studied extensively. For example Ben Miller cites 12%, but this does not count inflation and starting in 1986 will only consider a big bull market (sure with a couple of downturns, but still...)

Do not limit yourself to 15%. Most of the time saving much more than that is very much possible, even if you are a low-income worker. Increasing the savings rate has three effects: (1) increases the amount of money you save each month, (2) lower the expenses the amount of money will have to cover and (3) makes the compounding effect of the money you save much higher (you increase the multiplier in the exponent).

Let me repeat that 4% it the maximum you can assume if you want to be sure to have at least that return in the long term. It's not the average, it's the minimum, the value you can expect and plan with.

Just to reinforce the claim, I can cite Irrational Exuberance of Robert Schiller, who explicitly says, on page 135 of the 2015 edition, that from January 1966 to January 1992 the real annual return was just 4.1%. Sure, this does not matter so much if you are investing all the way through, but it's still a 26 year period.

You say 4% and cite the Trinity Study. But, 4% is the safe withdrawal rate T-S suggests is safe, not the return.
– JoeTaxpayer♦Jul 29 '17 at 23:21

True. If I have 4% return then I can withdraw 4% without decreasing the principal (more or less). Anyways assuming 10% return is too high an expectation.
– Francesco PasaJul 30 '17 at 10:32

4

My last comment here - Trinity assumption is that withdrawal starts with 4% of assets, but increases each year with inflation. You cited a well known study either without reading it or perhaps fully understanding it.
– JoeTaxpayer♦Jul 30 '17 at 14:46

"makes the compounding effect of the money you save much higher (you increase the multiplier in the exponent)." That doesn't make sense.
– AcccumulationJun 13 '18 at 21:45

Of course you can save 65% of your income – if it is high enough and your costs are low enough.
– glglglApr 9 at 12:49

First and foremost, it is a lock box. Just that alone should give anyone pause about putting too much into the 401k.

If you need money to buy your first house? Well you really can't touch that 401k money without taking a huge penalty (https://www.moneycrashers.com/401k-ira-withdrawal-down-payment-house/). You can borrow against it, but you have to pay yourself back and it counts towards your ability to finance the loan. Well you might say, you can wait on your house... But your house is often your biggest asset and it is often a good investment. It is also a great tax shield. And every dollar you put into paying your own mortgage is a dollar you aren't putting into paying your landlord's mortgage.

Too much 401k too early, I think is a key reason why millennials are delaying their home purchases, which also delays other life events.

But the lockbox problem doesn't end there. It is often a managed lockbox. If you see a great stock opportunity (suppose you want to go all in on Apple after the iphone unveil), well all your money is tied up in your 401k plans. Yes, some employers 401k have a brokerage account (https://www.investopedia.com/articles/personal-finance/061314/rise-401k-brokerage-accounts.asp), but many don't. All things being equal, one should pick an employer with a self managed 401k plan with no restrictions.

This lack of flexibility hurts.

But the problem doesn't end there.

401k is not a pension.

As a result, the performance of your account will be hugely affected by the overall market. If you start your career right at a major crash, count yourself super lucky! You get to start your 401k contribution when things are reasonably priced.

But if you end your career during a major crash then it would be a disaster. (for obvious reasons)

Pension (with a large number of participants of varying ages) takes that volatility out of the equation. The only problem with the pension plan is, they over promise... making it unsustainable. (the real fix for the pension is to lower the promise, or increase the contribution.)

So will you become a millionaire? in 40 years? maybe... but you have to remember by the time you are 65, the purchasing power of that million won't be much...

should you contribute to your 401k? if your company matches, absolutely. You must get the match (that's free money)... but beyond that.. it is really another investment with some pros and quite a few cons.

Thank you for your interest in this question.
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